From New York to Nkandla, shale gas is indeed a game-changer

JONATHAN DEAL

15 JUL 2014 01:19 (SOUTH AFRICA)

Shale gas has been hailed as a game changer worldwide, but many of the numbers being crunched are outdated – and the reality is a little more sobering. It’s worth picking up on US shale gas hype and bringing it down to earth in the Karoo.

Since 2011, there have been some incredible statements from oil and gas executives, but the uncontested winner must come from Chris Faulkner: “There is enough oil and gas underground (in America) to supply America for an almost endless amount of time.”

Shale gas has been hailed as a game changer worldwide, but many of the numbers being crunched are outdated – and the reality is a little more sobering. It’s worth picking up on US shale gas hype and bringing it down to earth in the Karoo.

Since 2011, there have been some incredible statements from oil and gas executives, but the uncontested winner must come from Chris Faulkner: “There is enough oil and gas underground (in America) to supply America for an almost endless amount of time.”

I met Faulkner, the soft-spoken CEO of Breitling Energy, when he presented on shale gas at a conference in Johannesburg. He was smartly dressed, self-assured and articulate. What I read in his interview with RIGZONE caused my jaw to drop open. RIGZONE’S Gene Lockard quizzed Faulkner on the recent decision by the New York Court of Appeals, in which the Court upheld lower court rulings, which allow municipalities to apply zoning ordinances to ban the practice of fracking within their borders.

Faulkner’s clanger, though, is nothing to do with the court decision but rather a statement that appeared later in the text. Responding to a question about how the ruling will affect drilling activity in New York State, Faulkner guesses that ‘drillers will go where the oil and gas is,” and elaborates: “As we’ve all seen, there’s enough oil and gas underground to supply America for an almost endless amount of time…”

Let’s rewind that. “Enough oil and gas underground to supply America for an almost endless amount of time.”

Consider President Obama on 25 Jan 2012: “We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy.” President Obama has no doubt been misinformed by:

Aubrey McClendon, ex CEO of Chesapeake Energy, on CBS News’ 60 Minutes November 14 2010: “In the last few years we have discovered the equivalent of two Saudi Arabias of oil in the form of natural gas in the United States. Not one, but two.” Asked by talk show host Stahl: “We have twice as much natural gas in this country, is that what you are saying, than they have oil in Saudi Arabia?” McClendon responded, “I am trying very clearly to say exactly that.” To place McClendon’s Saudi Arabia claim in perspective, in 2011, the annual BP Statistical review of Saudi Arabia was 264.5 billion barrels of proven oil reserves as at the end of 2010 – when McClendon made his claim. This is the equivalent of 1587 tcf. of natural gas multiplied by two (as in two Saudi Arabias) and thus equals 3,174 tcf or enough to power the US at its current rate of consumption for approximately 125 years.

Also weighing in is the US Energy Information Administration (EIA). This body, largely responsible to US Congress for Energy forecasts, reduced Marcellus shale figures in Pennsylvania, in August 2011 from 410tcf to 84tcf after estimating reserves at 2tcf in 2002. During this time Professors Timothy Considine and Robert Watson of Penn State University, in what became known as the Penn State Report 2009 stated that “While reserve estimates… are somewhat uncertain at this early stage, estimates of recoverable reserves of at least 489 trillion cubic feet seem increasingly reasonable”.

The same report also predicted $35 billion in added value and almost 175,000 jobs in 2020. And well-known oil and gas advocate Daniel Yergin – Cambridge Energy Research Associates – predicted that world oil and natural gas liquids capacity could increase by as much as 25% by 2015, with Robert W Esser, director of CERA, asserting: “Peak Oil theory is garbage as far as we’re concerned.” Yergin in 2011 wrote in an article published by the Wall Street Journal that there is more than a 100-year supply of natural gas. It was also reported February 2014 by Moneynews that Yergin claims: “The emergence of shale gas and tight oil in the US demonstrates… how innovation can change the balance of global economic and political power.”

Reviewing the Zuma administration’s Shell-fed shale gas hype, I have to agree. Academic support for the shale gas boom was not far behind, although with a 50% caution, in the words of Professor Terry Engelder (Penn State University) who reported in the Fort Worth Basin Oil and Gas Journal (August 2009), that based on his own calculation, [there was]a 50% probability that the Marcellus would ultimately yield 489tcf.

The real numbers, especially through 2011-2013, reflect a markedly different trend. Between 2006 and 2011, Chesapeake sold whole or partial shale play interests for $17.9 billion, with the bulk of the sales being made to foreign buyers: Total, BP, Statoil and BHP Billiton. As reported later in this document, on those purchases BHP took a $2.84 billion write down, BP took a $2.1 billion write down, and in October 2013 Shell announced that they were selling up in Colorado and Texas, with outgoing Shell CEO Peter Voser telling Financial Times he regretted Shell’s huge bet on US Shale. And as a further example of industry exaggeration, shortly before selling Fayettville shale assets to BHP Billiton in Feb 2011 for $4.5 billion, Chesapeake claimed that EUR (estimated ultimate recovery per well) for Fayettville was up to 2.6bcf from 2.4 Bcf. But this claim is belied by an analysis of 4,258 wells in the Fayettville shale from January 2005 to July 2012 showing that only 1,116 (26%) have produced greater than one Bcf and only 86 wells (2%) have produced greater than two Bcf. This puts average cumulative production per well over 887 wells for Chesapeake/BHP in Fayettville at 719 MMcf – that’s 72.35% in the wrong direction. It’s little wonder that less than 18 months after acquiring Chesapeake’s Fayettville assets, BHP wrote off $2.84 billion – more than a 50% reduction from the purchase price. Is this what South Africa’s Public Investment Corporation (PIC’s) Dan Matlila is so keen to invest state pensions in? Matlila told Reuters in February 2014 that “[s]hale gas will be a game changer here and we will be the biggest investor.”

And in 2011, Cape Town, South Africa, the US hype was embraced by Professor Brian Kantor, at the time the chief economist and strategist for Investec Bank SA.Kantor, working on figures for South Africa of 485tcf (just in the Karoo basin), said: “Were this potential output of natural gas estimated as recoverable by the US EIA, to be captured from the Karoo shale, it would be very large potatoes indeed. It would be the equivalent to about 402 years of SA consumption of oil at current rates: 365*550 00 = 202.575m per annum; (83000mb/202.575mbpa) = 402 years.”

The 485tcf has subsequently been reduced to 390tcf, and now by South African scientists to just 40tcf. Alarmingly, the Econometrix report of Shell SA, at the time thoroughly trumpeted around South Africa by Shell and based on a percentage of 485tcf, has not been reduced 13 times. In 2013 Treasure Karoo Action Group published a peer-reviewed analysis of the Econometrix report by Professor Martin De Witt, which concluded, inter alia, that the [Econometrix] report falls short in many areas. Nor has Professor Kantor publicly reduced his 2011 forecast of 402 years of energy for SA. And in May 2014, shale proponents were shocked by the EIA revelation that it had in one fell swoop reduced the recoverable Californian Monterey shale reserves by 96%. This shale play had previously been described by energy analysts and shale proponents like Nick Greely in the UK as “… the star of the North American show … California shale will… reinvigorate the Golden State’s economy over the next two to three years.”

Meanwhile in South Africa, President Jacob Zuma, presumably referencing the same sources as Mr. Faulkner and the infamous Shell/Econometrix report, continues to label shale gas as a game changer for South Africa, even linking it to much-needed jobs. Mr. Zuma’s view on shale gas, as with many of his Cabinet Ministers, is just as outdated as the USGS estimates of 485tcf. In my view, our president is betting on a resource using figures that have been reduced 13 times. His stoic refusal to acknowledge global resistance to shale gas mining and the uncounted costs of shale mining to the environment and the taxpayer of this country, make it seem that he wants any news as long as its good. Shale gas may well be a game-changer, but there is a winner and a loser in every game – and I wonder if our president is backing the winning team. DM

An online article July 8, by oil and gas industry mouthpiece RIGZONE proclaims “SOUTH AFRICA EDGES CLOSER TO KAROO SHALE GAS DEVELOPMENT” Peppered with inaccuracies, and drawing on phrases like ‘rolling blackouts in South Africa in May of this year’, the article regurgitates the industry speculation that we have heard in this country since January 2011. Here is the article. My reply to RIGZONEon their own online comment section may not be published, and is set out underneath the RIGZONE article.

I believe that the article is poorly researched, and as one would expect biased towards the oil and gas industry that supports your publication. As proof, I mention just one point that jumps out of the text. ‘300 000 to 700 000 jobs over 25 years. (485tcf)’ Anyone who has done their homework knows that South African scientists long ago reduced that figure from 485 to 40tcf – so any estimates based on 485 are irrelevant – much like the industry hype and speculation over Monterey. No Sir, those backing shale mining in SA may feel that it is edging closer, but actually the news on shale gas globally is not good and is building a strong body of evidence against SA moving ahead under the current circumstances. Jonathan Deal, CEO, Treasure Karoo Action Group, South Africa.

“… the star of the North American show is barely on most people’s radar screens. California shale will… reinvigorate the Golden State’s economy over the next two to three years.”

The question that must be in most people’s mind now is how long will government leaders and captains of industry be fooled by the false claims of the oil and gas industry? – Jonathan Deal

Write-down of two-thirds of US shale oil explodes fracking myth

Industry’s over-inflated reserve estimates are unravelling, and with it the ‘American dream’ of oil independence

An oil field over the Monterey shale formation in California: 96% reserve downgrade undermines claims that fracking is solution to the world’s energy needs. Photograph: David McNew/Getty Images

Next month, the US Energy Information Administration (EIA) will publish a new estimate of US shale deposits set to deal a death-blow to industry hype about a new golden era of US energy independence by fracking unconventional oil and gas.

EIA officials told the Los Angeles Times that previous estimates of recoverable oil in the Monterey shale reserves in California of about 15.4 billion barrels were vastly overstated. The revised estimate, they said, will slash this amount by 96% to a puny 600 million barrels of oil.

The Monterey formation, previously believed to contain more than double the amount of oil estimated at the Bakken shale in North Dakota, and five times larger than the Eagle Ford shale in South Texas, was slated to add up to 2.8 million jobs by 2020 and boost government tax revenues by $24.6 billion a year.

Industry lobbyists have for long highlighted the Monterey shale reserves as the big game-changer for US oil and gas production. Nick Grealy, who runs the consultancy No Hot Air which is funded by “gas and associated companies”, and includes the UK’s most high-profile shale gas fracker Cuadrilla among its clients, predicted last year that:

“… the star of the North American show is barely on most people’s radar screens. California shale will… reinvigorate the Golden State’s economy over the next two to three years.”

This sort of hype triggered “a speculation boom among oil companies” according to the LA Times. The EIA’s original survey for the US Department of Energy published in 2011 had been contracted out to Intek Inc. That report found that the Monterey shale constituted “64 percent of the total shale oil resources” in the US.

The EIA’s revised estimate was based partly on analysis of actual output from wells where new fracking techniques had been applied. According to EIA petroleum analyst John Staub:

“From the information we’ve been able to gather, we’ve not seen evidence that oil extraction in this area is very productive using techniques like fracking… Our oil production estimates combined with a dearth of knowledge about geological differences among the oil fields led to erroneous predictions and estimates.”

The Intek Inc study for the EIA had relied largely on oil industry claims, rather than proper data. Hitesh Mohan, who authored the Intek study for the EIA, reportedly conceded that “his figures were derived from technical reports and presentations from oil companies, including Occidental Petroleum, which owns the lion’s share of oil leases in the Monterey Shale, at 1.6 million acres.” Mohan had even lifted his original estimate for the EIA to 17 billion barrels.

Geoscientist David Hughes, who worked for the Geological Survey of Canada for 32 years, said:

“The oil had always been a statistical fantasy. Left out of all the hoopla was the fact that the EIA’s estimate was little more than a back-of-the-envelope calculation.”

Last year, the Post Carbon Institute (PCI) published Hughes’ study,Drilling California: A Reality Check on the Monterey Shale, which conducted an empirical analysis of oil production data using a widely used industry database also relied on by the EIA. The report concluded that the original EIA estimate was “highly overstated,” and unlikely to lead to a “statewide economic boom…. California should consider its economic and energy future in the absence of an oil production boom.”

A spokesman for the Institute, Tod Brilliant, told me:

“Given the incredible difference between initial projections of 15 billion barrels and revisions to 600 million, does this not call into account all such global projections for tight oil?”

As I’d reported earlier in June last year, a wider PCI study by Hughes had come to similar conclusions about bullish estimates of US shale oil and gas potential, concluding that “light tight oil production in the USA will peak between 2015 and 2017, followed by a steep decline”, while shale gas production would likely peak next year. In that post, I’d pointed out previous well-documented, and alarmingly common, cases of industry over-estimates of reserve sizes which later had been questioned.

Analysts like Jeremy Leggett have said, citing exaggerated oil industry estimates, that if reserve and production reality are indeed significantly lower than industry forecasts, we could be at risk of an oil shock as early as within the next five years.

The latest revelations follow a spate of bad news for industry reassurances about the fracking boom. New research published this month has found that measured methane leaks from fracking operations were three times larger than forecasted. The US Environment Protection Agency therefore “significantly underestimates” methane emissions from fracking, by as much as a 100 to a 1,000 times according to a new Proceedings of the National Academy of Sciences study published in April.

The Associated Press also reported, citing a Government Accountability Office investigation, that the US Interior Department’s Bureau of Land Management had failed to adequately inspect thousands of oil and gas wells that are potentially high risk for water and environmental damage.

Despite the mounting evidence that the shale gas boom is heading for a bust, both economically and environmentally, both governments and industry are together pouring their eggs into a rather flimsy basket.

According to a secret trade memo obtained by the Huffington Post, the Obama administration and the European Union are pushing ahead with efforts to “expand US fracking, offshore oil drilling and natural gas exploration”, as well as exports to the EU, under the prospective Transatlantic Trade and Investment Partnership (TTIP) agreement.

The shale mining fraternity, still reeling from the release of a Scientific Report on the effect of shale gas mining – released by the Canadian Council of Academies has been dealt another blow with the news that the golden energy goose of California has been reduced by 96% – by the US Energy Information Administration. The industry and its proponents in government and commerce have long been warned about the overhyping of shale gas assets in the US. Even in South Africa, the original estimates by the USGS, of 485tcf have been downgraded by South Africa’s own scientists to a ‘best case extraction scenario of 40tcf.

U.S. officials cut estimate of recoverable Monterey Shale oil by 96%

Aaron Kent, a wireline operator for Canary, works on a slick line at an oil rig pump jack site in the oil fields near Bakersfield. Kern County has seen a flurry of activity because of the potential for development of the Monterey Shale formation. (Al Seib, Los Angeles Times)

The Monterey Shale formation contains about two-thirds of the nation’s shale oil reserves

An earlier estimate assumed Monterey Shale oil deposits were as easily recoverable as those found elsewhere

Federal energy authorities have slashed by 96% the estimated amount of recoverable oil buried in California’s vast Monterey Shale deposits, deflating its potential as a national “black gold mine” of petroleum.

Just 600 million barrels of oil can be extracted with existing technology, far below the 13.7 billion barrels once thought recoverable from the jumbled layers of subterranean rock spread across much of Central California, the U.S. Energy Information Administration said.

The new estimate, expected to be released publicly next month, is a blow to the nation’s oil future and to projections that an oil boom would bring as many as 2.8 million new jobs to California and boost tax revenue by $24.6 billion annually.

The Monterey Shale formation contains about two-thirds of the nation’s shale oil reserves. It had been seen as an enormous bonanza, reducing the nation’s need for foreign oil imports through the use of the latest in extraction techniques, including acid treatments, horizontal drilling and fracking.

The energy agency said the earlier estimate of recoverable oil, issued in 2011 by an independent firm under contract with the government, broadly assumed that deposits in the Monterey Shale formation were as easily recoverable as those found in shale formations elsewhere.

The estimate touched off a speculation boom among oil companies. The new findings seem certain to dampen that enthusiasm.

Kern County in particular has seen a flurry of oil activity since 2011, with most of the test wells drilled by independent exploratory companies. Major oil companies have expressed doubts for years about recovering much of the oil.

The problem lies with the geology of the Monterey Shale, a 1,750-mile formation running down the center of California roughly from Sacramento to the Los Angeles basin and including some coastal regions.

Unlike heavily fracked shale deposits in North Dakota and Texas, which are relatively even and layered like a cake, Monterey Shale has been folded and shattered by seismic activity, with the oil found at deeper strata.

The narrative of fracking in the Monterey Shale as necessary for energy independence just had a big hole blown in it.– Seth B. Shonkoff, executive director of the nonprofit Physicians Scientists & Engineers for Healthy Energy

Geologists have long known that the rich deposits existed but they were not thought recoverable until the price of oil rose and the industry developed acidization, which eats away rocks, and fracking, the process of injecting millions of gallons of water laced with sand and chemicals deep underground to crack shale formations.

The new analysis from the Energy Information Administration was based, in part, on a review of the output from wells where the new techniques were used.

“From the information we’ve been able to gather, we’ve not seen evidence that oil extraction in this area is very productive using techniques like fracking,” said John Staub, a petroleum exploration and production analyst who led the energy agency’s research.

“Our oil production estimates combined with a dearth of knowledge about geological differences among the oil fields led to erroneous predictions and estimates,” Staub said.

Compared with oil production from the Bakken Shale in North Dakota and the Eagle Ford Shale in Texas, “the Monterey formation is stagnant,” Staub said. He added that the potential for recovering the oil could rise if new technology is developed.

A spokesman for the oil industry expressed optimism that new techniques will eventually open up the Monterey formation.

“We have a lot of confidence in the intelligence and skill of our engineers and geologists to find ways to adapt,” said Tupper Hull, spokesman for the Western States Petroleum Assn. “As the technologies change, the production rates could also change dramatically.”

“The smart money is still investing in California oil and gas,” Zierman said.

“The oil is there,” Zierman said. “But this is a tough business.”

Environmental organizations welcomed the news as a turning point in what had been a rush to frack for oil in the Monterey formation.

“The narrative of fracking in the Monterey Shale as necessary for energy independence just had a big hole blown in it,” said Seth B. Shonkoff, executive director of the nonprofit Physicians Scientists & Engineers for Healthy Energy.

J. David Hughes, a geoscientist and spokesman for the nonprofit Post Carbon Institute, said the Monterey formation “was always mythical mother lode puffed up by the oil industry — it never existed.”

Hughes wrote in a report last year that “California should consider its economic and energy future in the absence of an oil production boom from the Monterey Shale.”

The 2011 estimate was done by the Virginia engineering firm Intek Inc.

Christopher Dean, senior associate at Intek, said Tuesday that the firm’s work “was very broad, giving the federal government its first shot at an estimate of recoverable oil in the Monterey Shale. They got more data over time and refined the estimate.”

For California, the analysis throws cold water on economic projections built upon Intek’s projections.

In 2013, a USC analysis, funded in part by the Western States Petroleum Assn., predicted that the Monterey Shale formation could, by 2020, boost California’s gross domestic product by 14%, add $24.6 billion per year in tax revenue and generate 2.8 million new jobs.

As the full report on fracking – issued by the Council of Canadian Academies was released, the oil and gas industry – quite predictably are running around trying to do damage control.

Typical industry response as in the quote from David Pryce of the Canadian Association of Petroleum Producers was “We would not agree with that. The fact that we’ve been in this business for decades in the natural gas business and 10 years in the business of hydraulic fracturing, we’ve got a great deal of experience in this place.”

The sheer audacity of such a statement in the face of this report can only be based on one underlying fact – they make their money out of oil and gas production. Of course they would not want to ‘agree’ with the report. Moreover, to make such a statement on the day that the full report is released suggests a careless arrogance, and begs the question:

“How can the Canadian Association of Petroleum Producers make a judgement call on a report that they have not yet even read through, let alone studied”?

Having downloaded the report (available here) I provide an excerpt detailing the scientists and specialists involved in authoring and releasing the report, as well as the reviewers and the final protocol observed in the compilation, review and release of the report. In my view, this is a substantial body of work that cannot be brushed aside by political leaders.

“The report should be viewed by the ANC and the organs of the South African Government charged with responsibility, or involved in any decisions on Minerals and Petroleum as a serious reason to step back from the euphoric rush to pursue shale gas mining in this country under the current circumstances.” – Jonathan Deal

HERE FOLLOWS THE NAMES AND QUALIFICATIONS OF THE EXPERT PANEL: [emphasis of specialisation added for ease of reference]

Expert Panel on Harnessing Science and Technology to Understand the Environmental Impacts of Shale Gas Extraction

John Cherry, FRSC (Chair), Director of the University Consortium for Field-Focused Groundwater Contamination Research, Associate Director of G360 – Centre for Applied Groundwater Research, and Adjunct Professor in the School of Engineering at the University of Guelph (Guelph, ON)

This list of specialists, and the openness with which the report has been treated is in direct contrast to the conduct of the South African Department of Minerals which conducted an insular and secret investigation, releasing a document to the South African Cabinet, which lead to that body authorising the Minister of Minerals to lift the moratorium on shale gas mining in South Africa, under the conclusion that ‘Shale gas mining can be done safely.” – Jonathan Deal

HERE FOLLOWS THE NAMES AND QUALIFICATIONS OF THE REVIEWERS AND THE PROTOCOL APPLIED:

“Report Review

This report was reviewed in draft form by the individuals listed below — a

group of reviewers selected by the Council of Canadian Academies for their

diverse perspectives, areas of expertise, and broad representation of academic,

Oil and Gas specialist attorney, Luke Havemann weighs in on recent developments in the MPRDA and what they could mean for oil and gas majors eyeing shale gas in South Africa.

My awareness of shale gas’s revolutionary potential started a couple years back at the World Economic Forum meetings in Davos. During a private dinner for technology pioneers, each table was asked to share what they believe will be the most transforming process for America over the next decade (the audience was mostly from Silicon Valley). The most popular vote went to 3D printing, but my ears pricked up when the chairman of a major oil multinational suggested it would be shale gas – which, he claimed, would re-industrialise the USA. As South Africa’s reserves are supposedly close to those that America possesses (and our economy one seventy fifth the size) I have been paying close attention ever since. Including reading the detailed research into SA’s shale gas potential by the late Tony Twine. When the way was cleared for Royal Dutch Shell to go ahead with a $200m exploration project in the Karoo, like many others I started to get really excited about the country’s potential game-changer. But in their eagerness to cash in – or perhaps ignorance of investment processes – South Africa’s politicians appear to have badly over-reached with a last minute amendment to proposed legislation governing oil and gas. On top of a free 20% slice of all new shale gas businesses, the Government is now demanding the legalise an option to buy the balance of any project at “an agreed price”. The only local lawyer with a PhD in the subject, ENSafrica’s Luke Havemann, is appalled. He warned us yesterday ahead of the Parliamentary vote which approved the amended Bill. This afternoon’s interview began with my reference to DA shadow minister James Lorimer’s assertion that the amendment was catastrophic. – AH

DR LUKE HAVEMANN: ‘Catastrophic’ is a strong word, but in this situation, strong words are appropriate. We’re sitting with a situation where the legislation is threatening the very existence of the South African oil and gas industry. It is something you can use the word catastrophic for.

ALEC HOGG: Just unpack it for us.

DR LUKE HAVEMANN: Well, as you more than likely know, we have for some time been debating the Mineral and Petroleum Resources and Development Bill. There have been many problems with that bill over the course of the last few months. Many commentators have picked up on them, but the one that’s really sticking out at the moment is this one about the free trade interest and the additional further percentage that the government will be able to acquire down the line. What you’re really looking at there is the taking over essentially, of the endeavours of the oil and gas industry by the government. It has been described, as you know, as nationalisation by stealth but perhaps expropriation is a better term. I don’t know if you’d perhaps like me to get into those percentages.

ALEC HOGG: Sure, but just before we get there we had Rob Davies on CNBC Africa this morning actually, being rather flippant about the resistance to this, saying that there are companies lining up to get involved in shale gas. So government doesn’t think it’s going to have any problems in finding new investors in this sector.

DR LUKE HAVEMANN: Well, were those investors aware of the amendments made a week ago? This current possible percentage of 80 plus 20 – 100 percent of your operation being taken away from you – that only came into being a week ago. Yes, people have been lining up. We were an exceptionally attractive frontier province for some time now. The last few years have seen an explosion of interest in offshore and onshore acreage, but that was under a very different set of circumstances. The new set of circumstances, which was brought before the Mineral Resources Committee without input from the industry and even without input from the DA members of that committee, is something that’s very new so Mr Davies’ opinion should perhaps be tempered by knowledge of the fact that the current situation only recently came into being. We have yet to receive the industry’s comment on it.

ALEC HOGG: It seems as though the media so far has been missing the point, certainly from the way you described it to us yesterday. There’s a free carry of 20 percent and I don’t know if too many people can argue with that. The country owns the shale gas, but the problem has been over and above the 20 percent. If I understand it correctly: up until last Wednesday, Shell would do their exploration and whatever business it decided to create in shale gas, it knew that it would have to give 20 percent to the government?

DR LUKE HAVEMANN: Yes, that is the free carried interest. That was in the pipeline and that was understood. There was some resistance to it, but it wasn’t unacceptable and it could be lived with, so yes, that was the situation.

ALEC HOGG: In addition to that, there was a further amount that government would be allowed – or the state of South Africa would be allowed – to buy in the growing concern, and that amount was 30 percent – correct?

DR LUKE HAVEMANN: That’s correct. There was an option to acquire a further…in the amount of 30 percent and that has since changed.

ALEC HOGG: All right. So at least the investors were falling over themselves apparently – according to Rob Davies – when they knew they had to give 20 percent of their business to the government and government would have the ability, if it so chose at some stage in future, to go up to 50 percent to a joint partnership. The problem is that 30 percent has changed.

DR LUKE HAVEMANN: Well, that’s the word that’s been bandied about. When it first came to light in that Mineral Resources Committee meeting, the relevant members from the DA said ‘but this is nationalisation’. I think they were the ones who first used the word. It certainly smacks of it. It’s something that needs to be looked at very closely.

ALEC HOGG: Let’s just understand this in terms that anyone can understand. Shell is going to spend two-and-a-half billion Rand/250 million US Dollars exploring. If it all comes out rosy, as we all hope as a nation, and then they might possibly spend another $10bn for argument’s sake, in creating a business here. If that business becomes profitable, the way the law is now written the government of South Africa can buy back that business. At what price?

DR LUKE HAVEMANN: Well, the original position was that they’d have to pay Fair Market Value. That has apparently since changed, under the latest Amendments to the Bill and is now going to be ‘acquisition at an agreed price’. What is an agreed price? What is it going to be? That’s the next question, now. That’s the latest Amendment.

ALEC HOGG: So an agreed price between two parties in fact, could be quite a long way from market value.

DR LUKE HAVEMANN: It could very well be a long way from market value. The interesting thing is the new legislation says the state is entitled…has a right to exercise that option, so there’s a strength on the side of the law – on the state’s side.

ALEC HOGG: So government has approved these Amendments. What happens next?

DR LUKE HAVEMANN: The Bill will now go to the National Council of Provinces to be voted on there. After that, it needs to go to the President for his signature to become law, so there are still two steps left.

ALEC HOGG: And if it does become law, what is your sense from the industry about how they will react?

DR LUKE HAVEMANN: Well, the industry may well challenge it. I know if many of them will be willing to do so, because you don’t ever want to bite the hand that feeds you. At the end of the day, the state is the one that grants you the rights you need in order to exploit our resources, so to challenge them would not necessarily be in your best interest. There may be a backlash. What they may well do is simply relinquish their acreage, start looking elsewhere, and look for a favourable legal environment – further north perhaps.

ALEC HOGG: But surely, there’s a Plan B in all of this from the government’s perspective. If you are putting these draconian measures into law, that will get rid of most Western Investors. Would it be someone in the east perhaps, who is ready to come in?

DR LUKE HAVEMANN: Okay, this is all speculation. I’d like to know what government’s Plan A is at the moment; let alone what Plan B is. This sudden change of tack at the moment is leaving everyone with their jaws open, saying ‘what are we doing? What’s the motivation?’ I’d love to understand it and many of us would.

ALEC HOGG: Not quite everyone…Rob Davies says that they’re lining up to come in, but as you say, perhaps he’s working on outdated material.

DR LUKE HAVEMANN: Look, I think what he needs to do is consult with the industry. The industry – when the news broke – said ‘we weren’t consulted on this’, so let’s consult with the industry, unless he did so in the course of the last week. Let’s hear what they have to say about it.